FFH: S&P Revises Outlook to Stable from Positive

Standard & Poor’s has announced:

  • Following a review under our revised insurance criteria, we are affirming our ratings on Fairfax and its core subsidiaries.
  • The ratings predominantly reflect our view of the group’s strong business and financial risk profiles, based on its strong competitive position and very strong capital and earnings.
  • We have revised our outlook to stable from positive based on our view that Fairfax will gradually improve its underwriting results and fixed-charge coverage metrics but not enough to warrant an upgrade in the near term.

We assess Fairfax’s capital and earnings as very strong, which we expect to continue in our base-case economic scenario despite the current low interest rates. Its capital adequacy according to our proprietary capital model is currently at the lower end of the ‘AA’ category, which is somewhat lower than historically mainly because of the reduction in interest rates used to discount loss reserves. The group’s exposure to natural peril and man-made catastrophes and uncertainty related to its substantial casualty reserves (both ongoing and runoff) translate into a moderate risk position score, partially offsetting its very strong capital adequacy. Shareholders’ equity (including preferred shares) totaled $8.9 billion as of year-end 2012, up from $8.4 billion as of year-end 2011. We expect Fairfax to maintain its capital adequacy at an ‘AA’ level.

We regard Fairfax’s risk position as moderate. The group has minimal exposure to employee benefit liabilities. Although its exposure to high risk assets is at 70% of total adjusted capital, Fairfax carries substantial cash and liquid fixed-income securities to counterbalance the volatility of equities. About 75% of the portfolio is invested in cash and fixed-income securities with a weighted average rating of ‘A+’. But we are concerned about potential capital and earnings volatility due to its exposure to property catastrophe losses, its willingness to take significant concentrated investment positions to achieve above-average returns, and its asbestos and environmental exposure.

The now obsolete Positive Outlook was reported on PrefBlog when it came into effect …. nearly two years ago!

Fairfax has the following preferreds outstanding: FFH.PR.C, FFH.PR.E, FFH.PR.G, FFH.PR.I AND FFH.PR.K. All are FixedResets; all are relegated to the Scraps index on credit concerns.

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